Comptroller of Treasury v. World Book Childcraft Intern., Inc.

• Decision Date: 01 September 1985
• Docket Number: No. 951,951
• Citation: 508 A.2d 148,67 Md.App. 424
• Parties: COMPTROLLER OF the TREASURY v. WORLD BOOK CHILDCRAFT INTERNATIONAL, INC. ,
• Court: Court of Special Appeals of Maryland

Page 424

67 Md.App. 424

508 A.2d 148

COMPTROLLER OF the TREASURY v. WORLD BOOK CHILDCRAFT INTERNATIONAL, INC.

No. 951, Sept. Term, 1985.

Court of Special Appeals of Maryland.

May 9, 1986.

Certiorari Denied August 22, 1986.

John K. Barry, Asst. Atty. Gen., Annapolis (Stephen H. Sachs, Atty. Gen., Baltimore, and Gerald Langbaum, Asst. Atty. Gen., Annapolis, on brief), for appellant.

Harry D. Shapiro (Neil C. Kahn and Venable and Howard, on brief), Baltimore, for appellee.

Argued before ALPERT, BLOOM and ROBERT M. BELL, JJ.

ALPERT, Judge.

For the first time, in a corporate income tax case, we are asked to decide which party bears the burden of establishing the tolling of the statute of limitations.

This is an appeal by the Comptroller of the Treasury, Income Tax Division, from a judgment of the Circuit Court for Baltimore City affirming a decision of the Maryland Tax Court. The tax court reversed an assessment for Maryland corporate income tax, originally entered on April 16, 1979, in the amount of $512,040 for the taxable years ending 9/30/39 through 9/30/77, against the appellee, World Book Childcraft International, Inc.

Appellant contends the circuit court erred in affirming the tax court's decisions that:

1. the Comptroller bore the burden of demonstrating the applicability of an exception to the bar of the statute of limitations on assessments for the fiscal years in question, and

2. the Comptroller failed to meet its burden of establishing that appellee had a duty to file Maryland corporate income tax returns for the years at issue.

For reasons explained herein, we shall address these issues in inverse order, and shall affirm.

BACKGROUND

On April 16, 1979, an assessment alleging taxes due for the years 1939-1977 was entered against appellee, World Book Childcraft International, Inc., based upon figures supplied to Manfred Oppenheim, a corporate auditor for the appellant Comptroller, by appellee's "director of domestic taxes" from its national headquarters in Chicago, Illinois. World Book had never filed Maryland income tax returns during any of the years at issue. World Book was incorporated under the name of Field Enterprises Educational Corporation on March 13, 1957. Even though there was no evidence of any pre-existing entity prior to 1957, the Comptroller chose the year 1939 as the starting date for the delinquency in that that was the year Maryland's corporate income tax law was enacted.

Proceedings were initiated in the Maryland Tax Court on May 16, 1984. Before the hearing in the tax court, World Book moved, pursuant to Md.Ann.Code Art. 81 § 309(b), ¹ to shift the burden of proof to the Comptroller to show that the taxes, penalties and interest assessed against them for the years ending September 30, 1939, through September 30, 1975, were not barred by the statute of limitations. ² The motion was granted on October 22, 1981.

At the hearing, the appellant conceded that there was no proof of tax liability for the years 1939-1956 before appellee or its predecessor corporation, Field Enterprises Educational Corporation, existed. As to the years 1957-1975 the tax court found that the Comptroller had failed to sustain its burden of proof that World Book's activities in Maryland produced income which was subject to corporate taxation. As to the years 1976-1977 (not barred by limitations) the tax court held that appellee did not owe any taxes because of a net operating loss in 1976 which should have been carried forward to erase the liability for 1977 as well.

On June 5, 1984, the Comptroller appealed the tax court's decision to the Circuit Court for Baltimore City. That court, with Judge Elsbeth Bothe presiding, in a memorandum opinion dated June 19, 1985, affirmed the decision of the tax court reversing the Comptroller's assessment. Specifically, the court held that the tax court correctly placed upon the Comptroller the burden of proof to show that appellee World Book had a duty to file Maryland corporate income tax returns and pay Maryland income tax for the fiscal years 1939 through 1975. The court further held that the appellant had not sustained its burden.

Appellant brings this appeal contesting the propriety of the allocation of the burden and the finding that that burden was not sustained.

THE ISSUES

The first issue raised by appellant is whether the tax court was correct in ruling that it bore the burden of showing that the assessments for the years 1939-1975 were not barred by the statute of limitations. Appellant insists that World Book, by pleading limitations as a defense to the assessment, had the burden of proving that it was entitled to this affirmative defense.

Md.Ann.Code Art. 81 § 309(b) (1980 Repl.Vol.) provides that the limitations period for assessments does not begin to run until either "3 years after the return was filed or within 3 years after the due date for such return, whichever date is later." Under this section, the Comptroller's assessment, made in 1979, would have been barred by limitations for all but the years 1976-1977, unless an exception to the running of the statute could be proven.

Art. 81 § 309(c)(2) provides the only exception which would be applicable to the case at hand In the case of a failure to file a return or in the case of the filing of an incomplete return, the tax may be assessed at any time.

(Emphasis added).

Before we address the question as to the proper allocation of the burden of proving an exception to the statute of limitations, we must determine whether "there was any failure to file" against which the statute even began to run; that is, whether appellant demonstrated that appellee was required to file returns for the years in question.

I. Sustention Of The Burden

A. Failure to file/duty to file

As the circuit court noted, there can be no "failure to file" unless there is first a "duty to file" and a neglect thereof.

Whether a duty to file a return exists is determined by two statutes. The Maryland statute is Article 81, Section 316(c) (now codified as § 316) which provides:

The remaining net income, hereinafter referred to as business income, shall be allocated to this State if the trade or business of the corporation is carried on wholly within this State, but if the trade or business of the corporation is carried on partly within and partly without this State so much of the business income of the corporation as is derived from or reasonably attributable to the trade or business of the corporation carried on within this State, shall be allocated to this State and any balance of the business income shall be allocated outside this State. The portion of the business income derived from or reasonably attributable to the trade or business carried on within this State may be determined by separate accounting where practicable, but never in the case of a unitary business; however, where separate accounting is neither allowable nor practicable the portion of the business income of the corporation allowable to this State shall be determined in accordance with a three-factor formula of property, payroll and sales, in which each factor shall be given equal weight and in which the property factor shall include rented as well as owned property and tangible personal property having a permanent situs within this State and used in the trade or business shall be included as well as real property. The Comptroller of the Treasury shall have the right, in those cases where circumstances warrant, to alter any of the above rules as to the use of the separate accounting method or the formula method, the weight to be given the various factors in the formula, the manner of valuation of rented property included in the property factor and the determination of the extent to which tangible personal property is permanently located within the State.

Restricting the right of states to impose such taxes is 15 U.S.C. § 381 et seq. (1976), which prohibits a state from imposing taxes on net income derived in the state from interstate commerce unless the business activities of the corporation within the state meet certain minimum standards. The federal statute provides, in pertinent part:

Imposition of net income tax

Minimum standards

(a) No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or behalf of such person during such taxable year are either, or both, of the following:

(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and (2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).

The tax court held that, based on the evidence before it, appellee World Book's business activities within the state were not enough to establish a sufficient nexus to create an obligation on appellee to file state corporate income tax returns. The circuit court agreed.

Appellant now contends that the tax court erred in its holding that 15 U.S.C. § 381 operated so as to exempt appellee from the tax liability otherwise incurred under Art. 81 § 316. Specifically, appellant contends that the evidence of appellee's activities demonstrated that such activity went beyond the mere "solicitation of sales" granted immunity under 15 U.S.C. § 381.

The Comptroller's evidence consisted primarily of the testimony of its auditor, Manfred Oppenheim who, in 1977, after...